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Much flak has been directed at BT and telecoms regulator Oftel. Tim Conway looks at the troubled history of communications regulation in the UK and suggests a new way forward to promote competition

It is now evident that Oftel, the UK telecoms regulator, has failed markedly in its quest to have BT provide access to other carriers at the local loop level.

So far, despite promises from both Oftel and the Government that widespread access was likely before the end of the English summer and would enable competing suppliers to offer high-speed broadband services such as digital subscriber lines (DSL), just 361 BT exchanges have been listed.

The European Commission has reacted strongly, saying the UK has been "far slower" in introducing competition at the local loop level than other European Community member states. Other critics say that the listed exchanges are in lower traffic areas, thus leaving the plumpest sites to BT's on-going monopoly.

We are witnessing a sad example of regulatory failure. This fundamentally calls into question the continued relevance of current independent arrangements for regulation of telecommunications in the UK. At best, Oftel is revealed as an organisation basically powerless to push BT into opening up the local loop. At worst, Oftel will be cited in history as a stunning example of the captured regulator - a variation on the Stockholm syndrome, where hostages become converted to the cause of their captors.

Of greater concern, Government ministers at the recent Labour Conference reverted to BT data to refute OECD criticism, implying they may also be in the same position.

On top of this, research firm Ovum recently stated that, because of its dominant ownership of the local loop, only BT will be able to afford to roll out broadband services such as ADSL (faster DSL, for Internet access)to consumers and small businesses.

Unfortunately, BT will be constrained as to the rate at which it makes these services available by the limits of its own resources, not to mention the absence of any significant incentive to cannibalise existing services such as ISDN.

The result of all this? Britain will be much slower at rolling out broadband services than the US. More seriously, right now our European neighbours look set to overtake us.

The Government's response so far has been to lobby the European Commission to weaken the original EC proposal, which called for EU member states to offer third parties access to the local loops by 31 December 2000, at the latest. The UK proposed this deadline be extended where member states faced "technical problems" in meeting the timetable, and this will be accepted.

But the reality in the UK is not a technical problem, but regulatory failure. This will naturally affect how the UK is viewed as a location for investment in, and development of, broadband content and related services.

There is already evidence of this, with reports that major suppliers are withdrawing from supplying broadband services at the local level.

All this is in marked contrast with the promise Oftel made when it was set up in its ground-breaking, independent regulation role back in the mid-1980s: then, Brian Carsberg spoke of "patrolling the boundaries" of BT's monopoly to ensure competition was not stifled.

Perhaps now is the time to consider if there is another way to promote competition and re-establish the UK's reputation as a priority location for communication services.

In economics, when discussing regulation and competition, it is critical to survey characteristics such as market structures and identify the incentives that drive the market - and which likewise might be harnessed to produce change.

In the case of the local loop, there is now significant evidence of demand by consumers for a wider choice of services that can be delivered using their existing telephone connection - especially broadband, or "always on" Internet connection.

Equally, many competing suppliers are willing to offer such services; one of the alleged reasons for the failure of BT and Oftel to open up the loop on schedule was because of the large number of suppliers wanting to locate equipment in local exchanges, apparently causing concerns about physical space, power supplies, cooling and static electricity risks. The list - compiled by BT - goes on.

In these circumstances, one must favour a market mechanism to deliver to consumers the services they demand. But this immediately raises the question of ownership of the resources and assets that can be exploited to deliver the services. These are the local loop and the exchanges which switch them.

In the UK, the first approach to this was to encourage the development and deployment of alternative cable networks, based initially on meeting demand for subscription TV services. Some of these also carry telecommunications but penetration has not been as high as was hoped by policy-makers. In any case, pay-on-demand TV can be, and has been, equally well met by terrestrial and satellite services. Likewise, communications services can also be provided by alternative services such as wireless local loop technologies, and these should be encouraged.

However, the fact remains that the vast majority of consumers are served by BT's local loop and, under current arrangements, BT is likely to be limited (or to limit) in the speed with which broadband services are deployed.

One solution to this might be to separate, structurally and commercially, ownership and control of local loop assets into a separate company.

Unlike the current position, this new company would have a clear incentive to meet consumer demand in a timely fashion, and respond to suppliers by investing in capacity to meet their service needs. That is how it would make money, rather than by offering competing services as is presently the case.

There are plenty of precedents for this. In the US, local telephone companies effectively play this role: the idea of separate local or regional local loop companies ought not be ruled out in the UK.

In modern electricity and gas supply arrangements, there is a clear differentiation between firms providing infrastructure and supply, enabling contestability and competition.

Finally, of course, there is Railtrack - mention of which may be the kiss of death - but the circumstances between railways and telecommunications are markedly different.

It is time for debate to begin on these types of reforms. The UK is clearly falling behind and that will affect the competitiveness of knowledge based industries.

As to the future of Oftel, if the right market structure can be established, one must question the ongoing relevance of independent regulation of competition. General competition rules, as administered by the Office of Fair Training, might work best.

Tim Conway is policy director, at the Computer Software and Services Association

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